Full summary of the course Accounting for Performance Management
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Accountancy And Controlling
Management Accounting (MAC)
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1. Introduction .......................................................................................................................................... 5
A. Managerial Accounting: Decision Making and Control ................................................................................. 5
B. Design and Use of Cost Systems..................................................................................................................... 5
C. Marmots and Grizzly Bears ............................................................................................................................ 5
D. Management Accountant’s Role in the Organization .................................................................................... 5
E. Evolution of Management Accounting: A Framework for Change ................................................................. 6
F. Vortec Medical Probe Example....................................................................................................................... 6
2. The Nature of Costs ............................................................................................................................... 7
A. Opportunity Costs .......................................................................................................................................... 7
A.1 Characteristics of Opportunity Costs ...................................................................................................... 7
A.2 Examples of Decision Based Opportunity Costs ...................................................................................... 7
B. Cost Variation................................................................................................................................................. 8
B.1 Fixed, Marginal and Average Costs ......................................................................................................... 8
B.2 Linear Approximations ............................................................................................................................ 9
B.3 Other Cost Behavior Patterns.................................................................................................................. 9
B.4 Activity Measures .................................................................................................................................... 9
C. Cost-Volume-Profit Analysis ......................................................................................................................... 10
C.1 Example ................................................................................................................................................. 10
C.2 Calculating Break-Even and Target Profits ............................................................................................ 10
C.3 Limitations of Cost-Volume-Profit Analysis ........................................................................................... 10
C.4 Multiple products .................................................................................................................................. 10
C.5 Operating Leverage ............................................................................................................................... 11
D. Opportunity Costs versus Accounting Costs ................................................................................................. 11
D.1 Period vs Product Costs ........................................................................................................................ 11
D.2 Direct Costs, Overhead Costs and Opportunity Costs ........................................................................... 11
E. Cost Estimation ............................................................................................................................................ 11
E.1 Account Classification............................................................................................................................ 12
E.2 Motion and Time Studies ...................................................................................................................... 12
4. Organizational Architecture ...................................................................................................................... 12
A. Basic Building Blocks .................................................................................................................................... 12
A.1 Self-Interested Behavior, Team Production, and Agency Costs ............................................................ 12
A.2 Decision Rights and Rights Systems ...................................................................................................... 13
A.3 Role of Knowledge and Decision Making .............................................................................................. 13
A.4 Markets versus Firms ............................................................................................................................ 14
A.5 Influence Costs ...................................................................................................................................... 14
B. Organizational Architecture ......................................................................................................................... 14
B.1 Three-Legged Stool ............................................................................................................................... 14
B.2 Decision Management versus Decision Control .................................................................................... 15
C. Accounting’s Role in the Organization’s Architecture .................................................................................. 15
D. Example of Accounting’s Role: Executive Compensation Contracts............................................................. 16
5. Responsibility Accounting and Transfer Pricing ......................................................................................... 16
, A. Responsibility Accounting ............................................................................................................................ 16
A.1 Cost Centers .......................................................................................................................................... 16
A.2 Profit Centers ........................................................................................................................................ 17
A.3 Investment Centers ............................................................................................................................... 17
A.4 Economic Value Added (EVA)................................................................................................................ 18
A.5 Controllability Principle ......................................................................................................................... 19
B. Transfer Pricing ............................................................................................................................................ 19
B.1 International Taxation ........................................................................................................................... 19
B.2 Economics of Transfer Pricing ............................................................................................................... 19
B.3 Common Transfer-Pricing Methods ...................................................................................................... 20
B.4 Reorganization: The Solution if All Else Fails ......................................................................................... 22
B.5 Recap ..................................................................................................................................................... 22
6. Budgetting................................................................................................................................................ 22
A. Generic Budgeting Systems .......................................................................................................................... 22
A.1 Country Club ......................................................................................................................................... 22
A.2 Large Corporation ................................................................................................................................. 23
B. Trade-Off between Decision Management and Decision Control ................................................................ 24
B.1 Communicating Specialized Knowledge versus Performance Evaluation ............................................. 24
B.2 Budget Ratcheting ................................................................................................................................. 24
B.3 Participative Budgeting ......................................................................................................................... 25
B.4 New Approaches to Budgeting.............................................................................................................. 25
C. Resolving Organizational Problems.............................................................................................................. 26
C.1 Short-Run versus Long-Run ................................................................................................................... 26
C.2 Line-Item Budgets ................................................................................................................................. 27
C.3 Budget Lapsing ...................................................................................................................................... 27
C.4 Static versus Flexible Budgets ............................................................................................................... 27
C.5 Incremental versus Zero-Based Budgets ............................................................................................... 28
7. Cost allocation: Theory ............................................................................................................................. 28
A. Pervasiveness of Cost Allocations ................................................................................................................ 28
A.1 Manufacturing Organizations ............................................................................................................... 28
A.2 Hospitals................................................................................................................................................ 28
A.3 Universities ........................................................................................................................................... 28
B. Reasons to Allocate Costs ............................................................................................................................ 29
B.1 External Reporting/Taxes ...................................................................................................................... 29
B.2 Cost-Based Reimbursement .................................................................................................................. 29
B.3 Decision Making and Control ................................................................................................................ 29
C. Incentive/Organizational Reasons for Cost Allocations ............................................................................... 29
C.1 Cost Allocations Are a Tax System......................................................................................................... 29
C.2 Taxing an Externality ............................................................................................................................. 29
C.3 Insulating versus Noninsulating Cost Allocations .................................................................................. 30
8. Cost Allocation: Practices ......................................................................................................................... 32
A. Death Spiral ................................................................................................................................................. 32
B. Allocating Capacity Costs: Depreciation....................................................................................................... 32
9. Absorption Cost Systems .......................................................................................................................... 33
A. Job Order Costing ......................................................................................................................................... 33
B. Cost Flows through the T-Accounts .............................................................................................................. 33
C. Allocating overhead to Jobs ......................................................................................................................... 33
, C.1 Overhead rates ...................................................................................................................................... 33
C.2 Over/Underabsorbed Overhead ........................................................................................................... 34
C.3 Flexible Budgets to Estimate Overhead ................................................................................................ 34
C.4 Expected versus Normal Volume .......................................................................................................... 34
D. Permanent versus Temporary Volume Changes .......................................................................................... 35
E. Plantwide versus Multiple Overhead Rates .................................................................................................. 35
10. Criticisms of Absorption Cost Systems: Incentive to Overproduce ........................................................... 35
A. Incentive to overproduce ............................................................................................................................. 35
A.1 Example ................................................................................................................................................. 35
A.2 Reducing the Overproduction Incentive ............................................................................................... 35
B. Variable (Direct) Costing .............................................................................................................................. 36
B.1 Background ........................................................................................................................................... 36
B.2 Illustration of Variable Costing .............................................................................................................. 36
B.3 Overproduction Incentive under Variable Costing ................................................................................ 37
C. Problems with Variable Costing ................................................................................................................... 37
C.1 Classifying Fixed Costs as Variable Costs ............................................................................................... 37
C.2 Variable Costing Excludes the Opportunity Cost of Capacity ................................................................ 37
D. Beware of Unit Costs.................................................................................................................................... 38
11. Criticisms of Absorption Cost Systems: Inaccurate Product Costs ............................................................ 38
A. Inaccurate Product Costs ............................................................................................................................. 38
B. Activity-Based Costing.................................................................................................................................. 38
B.1 Choosing Cost Drivers ........................................................................................................................... 39
B.2 Absorption versus Activity Based Costing: An Example ........................................................................ 39
C. Analyzing Activity-Based Costing ................................................................................................................. 39
C.1 Reasons for Implementing Activity-Based Costing ................................................................................ 39
C.2 Benefits and Costs of Activity-Based Costing ........................................................................................ 40
C.3 ABC Measures Costs, Not Benefits ........................................................................................................ 40
D. Acceptance of Activity-Based Costing .......................................................................................................... 40
12. Standard Costs: Direct Labor and Materials ............................................................................................ 41
A. Standard Costs ............................................................................................................................................. 41
A.1 Reasons for Standard Costing ............................................................................................................... 41
A.2 Setting and Revising Standards ............................................................................................................. 41
A.3 Target Costing ....................................................................................................................................... 42
B. Direct Labor and Material Variances ........................................................................................................... 42
B.1 Direct Labor Variances .......................................................................................................................... 42
B.2 Direct Materials Variances .................................................................................................................... 43
B.3 Risk Reduction and Standard Cost ........................................................................................................ 43
C. Incentive Effects of Direct Labor and Material Variances ............................................................................ 43
C.1 Build inventories ................................................................................................................................... 43
C.2 Externalities ........................................................................................................................................... 44
C.3 Discouraging Cooperation ..................................................................................................................... 44
C.4 Mutual Monitoring ................................................................................................................................ 44
C.5 Satisficing .............................................................................................................................................. 44
D. Disposition of Standard Cost Variances ....................................................................................................... 45
E. The Cost of Standard Costs...................................................................................................................... 45
14. Management Accounting in a Changing Environment ............................................................................. 46
,A. Integrative Framework ................................................................................................................................ 46
A.1 Organizational Architecture .................................................................................................................. 46
A.2 Business Strategy .................................................................................................................................. 46
A.3 Environmental and Competitive Forces Affecting Organizations ......................................................... 47
A.4 Implications ........................................................................................................................................... 47
B. Organizational Innovations and Management Accounting ......................................................................... 47
B.1 Six Sigma/Total Quality Management ................................................................................................... 47
B.2 Lean/Just-in-Time Production ............................................................................................................... 48
B.3 Balanced Scorecard ............................................................................................................................... 49
B.4 Big Data/Data Analytics ......................................................................................................................... 50
,1. Introduction
A. Managerial Accounting: Decision Making and Control
Internal accounting system: component of the firm’s information system, includes budgets,
data on the costs of each product and inventory and periodic financial reports. As part of the
firm’s control system the ias helps align the interests of managers and shareholders to cause
employees to maximize firm value.
Internal accounting systems serve two purposes:
1. To provide knowledge necessary for planning and making decisions (decision making)
2. To help motivate and monitor people in organizations (control)
Control system: Mechanisms that help align employee interest with maximizing the
organization’s value. They include performance measures and incentive compensation
systems, promotions, demotions and terminations, security guards and video surveillance,
internal auditors and the firm’s inter accounting system.
B. Design and Use of Cost Systems
Internal accounting systems:
1. Provide information to assess the profitability of products or services and to optimally
price and market these products or services.
2. Provide information to detect productions inefficiencies to ensure that the proposed
products and volumes are produced at minimum cost.
3. When combined with the performance evaluation and reward systems, create
incentives for managers to maximize firm value.
4. Support the financial accounting and tax accounting reporting functions.
5. Contribute more to firm value than it costs.
C. Marmots and Grizzly Bears
Managers criticize accounting’s usefulness for making pricing or outsourcing decisions.
Accounting data are based on historical costs rather than current values, and hence contain
stale information.
Economic Darwinism suggests that successful firms should not change internal processes
unless they are clearly broken. Twee voorbehouden bestaan:
1. Just because a system survives does not mean that its benefits exceed its costs (might
be close to zero)
2. Just because a given system survives does not mean it is optimal. A better system
might exist but has not yet been discovered.
D. Management Accountant’s Role in the Organization
The CFO’s three major functions include:
1. Controllership
Tax adm., internal and external accounting reports, planning and control systems (incl.
budgeting).
2. Treasury
Short- and long-term financing, banking, credit and collections investments, insurance
and capital budgeting.
, 3. Internal audit
Seeks to eliminate internal fraud and to provide internal consulting and risk
management.
The controller has responsibility for data collection and reporting. Controllership function
involves assisting in decision making and control.
The controller must balance providing information to other managers for decision making
against providing monitoring information to top executives for use in controlling the behavior
of lower-level managers.
E. Evolution of Management Accounting: A Framework for Change
Two major environmental forces have changed organizations and caused managers to
question the appropriateness of traditional management accounting procedures.
1. Factory automation and technology
2. Global competition
Management accounting provides information for planning decisions and control. It is useful
for assigning decision-making authority, measuring performance, and determining rewards
for individuals within the organization.
Figure 1-3 shows a framework for understanding the role of accounting systems within firms
and the forces that cause accounting systems to change. (ook H14?)
F. Vortec Medical Probe Example
Niet samengevat. Lezen, want interessante voorbeelden.
Robinson-Patman Act is a federal law prohibiting charging customers different prices if doing
so is injurious to competition.
Four key points:
1. Be aware of average costs.
Just because a cost is stated in dollars per unit does not mean that producing one more
unit adds that amount of incremental cost.
2. Use opportunity costs.
Opportunity costs measure what the firm forgoes when it chooses a specific action
(H2)
3. Supplement accounting data with other info.
Accounting system don’t contain all relevant data such as customer demands,
competitors’ plans, future technology, government regulations
4. Use accounting numbers as performance measures cautiously.
Just because managers are maximizing particular performance measures tailored for
each manager does not necessarily cause firm profits to be maximized.
, 2. The Nature of Costs
A. Opportunity Costs
‘The cost of doing anything consists of the receipts that could have been obtained if that
particular decision has not been taken.’ Opportunity cost – the benefit forgone as a result of
choosing one course of action rather than another.
The return forgone from its use elsewhere is the opportunity cost of its current use.
It’s important to remember that opportunity costs can be determined only within the context
of a specific decision and only after specifying all the alternative actions.
Job offer Salary $ equivalent of int. Total value
A 100.000 8.000 108.000
B 102.000 5.000 107.000
C 106.000 500 106.500
D 0,9*110.000 + 0,1*48000 0 103.800
Job A is the best offer. The opportunity cost of job A is 107.000, representing the amount
forgone by not accepting B, the next best alternative.
The decision to continue to search for more job offers has an opportunity cost of 108.000 if
job offer A expires. If you declined job offer L last week, which had a total value of 109.000,
this job offer is no longer in the opportunity set and hence is not an opportunity cost of
accepting job A now. Job offer D: 90% probability of receiving 110.000 and 10% of forced
taking job of 48.000. Total value 103.800. Since job D’s opportunity cost of 108.000 (the next
best alternative forgone) exceeds its expected value (103.800) you should reject waiting for
job offer D.
A.1 Characteristics of Opportunity Costs
Opportunity costs are not necessarily the same as payments. The opportunity costs of
obtaining some good or service is what must be surrendered of forgone in order to get it.
Opportunity costs are forward looking. They are the estimated forgone benefits from actions
that could, but will not, be undertaken. Historical opportunities are no part of the opportunity
set!
Opportunity cost differ from (accounting) expenses. Opportunity cost is the sacrifice of the
best alternative action given. An (accounting) expense is a cost incurred to generate a
revenue. Financial accounting is concerned with matching expenses to revenues. In decision
making, the concern is with estimating the opportunity cost of a proposed decision (more in
section D)
A.2 Examples of Decision Based Opportunity Costs
Opportunity cost of materials (no other use)
The opportunity cost of these materials is whatever scrap value they have. If the materials
have no other alternative use and they have no storage of disposal cost, their opportunity cost
is zero. If the firm incurs cost for storage or disposal, then these materials have a negative
opportunity cost.
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